Not accounting for all costs, including a proportion of the overheads – such as phone bills, information technology and management – undermines the organisation’s financial stability. It is one of the biggest dangers facing voluntary and community organisations. Charities could also be in breach of Charity Commission rules if public sector contracts are subsidised by charitable resources.

Despite moves to extend the length of contracts to three years, the majority of service contracts are on a one-year basis. This means that the impact of not recovering the full cost can disrupt services soon into delivery.

In fact, between 2003 and 2005, a third of the organisations which were members of the Association of Chief Executives of Voluntary Organisations (ACEVO) – which now number around 2,000 – were forced to close down services due to financial insecurities caused by a failure to implement FCR. This is partly because, historically, services delivered by voluntary and community organisations have been under-funded.